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CORE ARGUMENTS Basic, critical elements of tax law formatted for easy incorporation in a brief or memorandum; content and purpose guidance and templates for tax court petitions and related filings; and more. UPDATED JULY 29, 2023 WHAT FOLLOWS is a collection of fundamental arguments that CtC-educated filers will find useful should it become necessary to sue a balky IRS or other tax agency in order to compel the refund of improperly-withheld money, or to petition Tax Court for relief from some other kinds of improper IRS behavior. The suitable circumstances could be simple agency stone-walling (such as is considered in this generic model of a complaint) or even more aggressive stone-walling, such as an agency assertion of a bogus "Notice of Deficiency". NOTE: The material here is NOT relevant to legal contests concerning the assertion of "frivolous return" penalties (FRPs). Briefly summarized, the relevant issues (which might also be called the "material facts") in an FRP assertion/contest are three: 1. Whether the penalty is asserted against an actual filed return (or purported return)-- rather than, for instance, a copy of a return sent to the agency as evidence of a previous filing; 2. Whether a targeted return lacks information sufficient for judging the substantial correctness of its self-assessment (as in missing numbers in places relevant places to the computation of the self-assessment) or contains information calling into question the substantial correctness of that self-assessment (as in having elements within it which contradict the self-assessment computation), and, IF either of these are true, bears evidence that such lack or such contradiction arises from the filer's embrace of a "position" listed on the Secretary of the Treasury's official list of penalty-qualified "frivolous positions" or from an intent to impede or delay the proper administration of the tax laws; and 3. Whether the penalty has been properly approved pursuant to 26 U.S.C. § 6751(b). For more on the FRP subject, see this page and all the materials linked therein. Note further that there is no inherent legal relationship between a FRP assertion and the validity of a return. FRP assertions concern a special definition of "frivolous" meant to equip the IRS to extract a financial penalty whether a return is valid and the refund or other claims thereon are correct or not. For a return to be "frivolous" in the context of a FRP does not make it frivolous (which, outside of the FRP context, means "without a basis in law") for purposes of processing or in regard to claims and declarations made thereon. PROCEDURAL ARGUMENTS Notices of Deficiency can only be issued by a very limited and expressly-identified list of personnel at the IRS to which that authority has been delegated by Delegation Order 4-8. If you've gotten such a notice, it may well be provably bogus just on the simple basis that the purported issuer lacked authority to send it. See a simple sketch of a motion regarding this issue (which might require customization, editing and enhancement based on the particulars of any given case) here. (NOTE: A recent ruling by the Eighth Circuit on this issue, in Muncy v. C.I.R., 890 F.3d 724 (2018), supports the requirement for a valid issuer. But the ruling also concludes that any "in-division" superior of an expressly-listed delegate can be deemed to possess any authority that has been delegated to his subordinate, and therefore can validly issue NODs on his own even though not expressly delegated the authority to do so. I don't consider this to necessarily be a valid argument (or, at least, consider it to be very weak and vulnerable), but I haven't yet had time to formulate the rebuttal. So, read the Muncy ruling and then look at your NOD and the delegation order text-- which you'll find in the brief above-- carefully to determine whether this evasion could be deployed in your case, and choose your course accordingly.) "INCOME" and "DEFICIENCY" ARGUMENTS THESE ARGUMENTS CONSTITUTE thoroughly-supported responses/rebuttals to erroneous government contentions that "income" was had by a filer beyond what was reported on an accurate and honest CtC-educated return, or that a liability or deficiency can or should be found to exist contrary to the self-assessment appearing on that return. As provided here, these arguments can serve as guides to the formulation of a complaint or petition (but are not themselves suitable for inclusion in a petition). Their various focal points illuminate the facts (both as to things that have happened and things that have not)-- exclusive of also-important procedural issues, affirmative defenses and the like-- which need to be alleged in either type of pleading (that is, in a complaint or a petition) and which need to be supported by evidence in trial or other proceedings pursuant to the complaint or petition. (A model of a complaint can be found at the link above; a model of a petition can be found here.) The arguments themselves CAN serve as the body of a brief in support of the facts and evidence with which they are concerned, once they are in the record. All of the arguments together are suited to typical federal Tax Court proceedings concerning a "Notice of Deficiency" and any state proceeding of the same kind, with some customization of the statutory references in part A possibly being necessary. Those found in part B are also suited to litigation to compel a refund should that become necessary and if the contest should go beyond the mere facts of a refund being properly claimed and the government being under a consequent statutory obligation which remains unfulfilled, as sketched out in the model of a complaint at the link above. (BTW, JUST TO GIVE A QUICK AND ROUGH sketch of the typical course of a Tax Court Petition proceeding: A Tax Court petition is a challenge to a tax agency "determination" (of deficiency or liability) by way of an assertion of facts-- not arguments, and not "facts of law"-- and assignment (allegation) of errors committed by the government in making (or presuming they are in a position to make, or even HAVE, legally, made) the determination. The Respondent's Answer is admissions or denials of the allegations (or "not enough information" responses), and (usually), allegations of their own in turn, to which the Petitioner must reply with admissions or denials of his/her own. Everything admitted in this exchange is a stipulation. When trial is approaching, another round of stipulations is offered by each side to the other, and the two are expected to get together and ultimately submit to the court a "joint stipulation" of facts one side or the other wants in evidence and which neither is prepared to contest or dispute. Trial consists of the subsequent presentation of additional evidence-- testimonial or otherwise-- which didn't get in by stipulation-- the admission of which (or not) will be decided by the court-- and then either closing arguments applying the law to the admitted evidence, or post-trial briefs doing that. READ THE RULES FOR TAX COURT TO GET A MORE COMPLETE UNDERSTANDING OF THIS SUBJECT.) Read through everything carefully and thoroughly-- including the notes at the end-- before attempting to make any use of this material. ARGUMENT A. RESPONDENT FAILS TO ALLEGE ANY FACTUAL FOUNDATION FOR HIS ALLEGATIONS OF DEFICIENCIES. A deficiency is defined as a positive difference between the correct amount of tax due on the income reported on a return and the tax on that income as calculated and self-assessed on that return: (a) In general For purposes of this title in the case of income, estate, and gift taxes imposed by subtitles A and B and excise taxes imposed by chapters 41, 42, 43, and 44 the term “deficiency” means the amount by which the tax imposed by subtitle A or B, or chapter 41, 42, 43, or 44 exceeds the excess of— (1) the sum of (A) the amount shown as the tax by the taxpayer upon his return, if a return was made by the taxpayer and an amount was shown as the tax by the taxpayer thereon, plus (B) the amounts previously assessed (or collected without assessment) as a deficiency, over— (2) the amount of rebates, as defined in subsection (b)(2), made. 26 U.S.C. § 6211. A deficiency can be determined either by identifying an error of math in applying the proper rate of tax to the amount of income, or by identifying an improper deduction against the amount of income prior to the application of the proper rate of tax. Respondent has alleged no errors of arithmetic and no improper deductions on or in regard to Petitioners' returns for any of the years involved in this case. Respondent's allegations of deficiency, therefore, are completely arbitrary, capricious and false. The Court should so find, and rule accordingly. B. RESPONDENT'S ALLEGATIONS OF UNREPORTED INCOME ARE WITHOUT FACTUAL FOUNDATION AND RESPONDENT BEARS THE BURDEN OF PROOF. Even if Respondent is imagined to have authority to allege deficiencies based on supposed errors in the amount of income reported on a return, rather than just math errors in applying the proper rate of tax to the amount reported or the impropriety of deductions taken against that amount, he would bear the burden of producing evidence to support his allegations, which are entirely lacking in factual foundation, arbitrary and capricious, and tainted by endless indications of bad faith, as will be shown throughout this memorandum. The beginning of that showing is that Respondent has produced nothing whatever to serve even as a basis for his claims. Instead, Respondent has arbitrarily and capriciously embraced self-serving, entirely unsupported and purely hearsay allegations made by unexamined others on what purport to be "information returns" (W-2s and 1099s) in some cases, and on nothing whatever in others. This is done without regard to this hearsay being squarely rebutted by Petitioners' sworn testimony, their pleadings in their Petition, and Respondent's own records, and Respondent's failure to raise those allegations to the level of legal sufficiency as required by 26 U.S.C. §§ 6201(d) and 7491(a), all as will be shown in the point-by-point analysis below. 1. The income tax is an excise tax, with liability arising only upon the happening of distinguished taxable events, not the mere receipt of money, or being paid for work. The income tax is an excise, and applies only to objects suited to an excise. It is not, and cannot lawfully be imposed as, a capitation or other direct tax. This is settled law in the United States, being expressly declared and re-affirmed by the United States Supreme Court both before and after the 16th Amendment, repeatedly and consistently: "[T]axation on income [is] in its nature an excise, entitled to be enforced as such..." Brushaber v. Union Pacific R. Co., 240 U.S. 1 (1916), a unanimous decision re-iterating the high court's conclusion in Pollock v. Farmer's Loan & Trust, 158 U.S. 601 (1895). "We are of opinion, however, that the confusion is not inherent, but rather arises from the conclusion that the 16th Amendment provides for a hitherto unknown power of taxation; that is, a power to levy an income tax which, although direct, should not be subject to the regulation of apportionment applicable to all other direct taxes. And the far-reaching effect of this erroneous assumption will be made clear by generalizing the many contentions advanced in argument to support it...” Ibid (emphasis added) The Brushaber court goes on to point out that the very suggestion of a non-apportioned direct tax (whether on "incomes" or anything else) is completely incoherent, because that would cause: “...one provision of the Constitution [to] destroy another; that is, [it] would result in bringing the provisions of the Amendment [supposedly] exempting a direct tax from apportionment into irreconcilable conflict with the general requirement that all direct taxes be apportioned. … This result, instead of simplifying the situation and making clear the limitations on the taxing power, which obviously the Amendment must have been intended to accomplish, would create radical and destructive changes in our constitutional system and multiply confusion."" Ibid. The Supreme Court re-iterates the Brushaber holding repeatedly over the decades: “[B]y the [Brushaber] ruling, it was settled that the provisions of the Sixteenth Amendment conferred no new power of taxation, but simply prohibited the previous complete and plenary power of income taxation possessed by Congress from the beginning from being taken out of the category of indirect taxation to which it inherently belonged, and being placed in the category of direct taxation subject to apportionment by a consideration of the sources from which the income was derived -- that is, by testing the tax not by what it was, a tax on income, but by a mistaken theory deduced from the origin or source of the income taxed.” Stanton v. Baltic Mining Co., 240 U.S. 103 (1916) (emphasis added). "If [a] tax is a direct one, it shall be apportioned according to the census or enumeration. If it is a duty, impost, or excise, it shall be uniform throughout the United States. Together, these classes include every form of tax appropriate to sovereignty. Cf. Burnet v. Brooks, 288 U. S. 378, 288 U. S. 403, 288 U. S. 405; Brushaber v. Union Pacific R. Co., 240 U. S. 1, 240 U. S. 12." Steward Machine Co. v. Collector of Internal Revenue, 301 U.S. 548 (1937) (emphasis added). "[T]he sole purpose of the Sixteenth Amendment was to remove the apportionment requirement for whichever incomes were otherwise taxable. 45 Cong. Rec. 2245-2246 (1910); id. at 2539; see also Brushaber v. Union Pacific R. Co., 240 U. S. 1, 240 U. S. 17-18 (1916)" South Carolina v. Baker, 485 U.S. 505 (1988), fn 13 (emphasis added). Contemporaneous and subsequent analysis by both private, executive branch and legislative branch experts acknowledge the Brushaber holding as settled law, to which all courts and agencies are subject: "The Sixteenth Amendment does not permit a new class of a direct tax... The Amendment, the [Supreme] court said, judged by the purpose for which it was passed, does not treat income taxes as direct taxes but simply removed the ground which led to their being considered as such in the Pollock case, namely, the source of the income. Therefore, they are again to be classified in the class of indirect taxes to which they by nature belong." Cornell Law Quarterly, 1 Cornell L. Q. pp. 298, 301 (1915-1916) "In Brushaber v. Union Pacific Railroad Co., Mr. C. J. White, upholding the income tax imposed by the Tariff Act of 1913, construed the Amendment as a declaration that an income tax is "indirect," rather than ... an exception to the rule that direct taxes must be apportioned." Harvard Law Review, 29 Harv. L. Rev., p. 536 (1915-1916) "The income tax... ...is an excise tax with respect to certain activities and privileges which is measured by reference to the income which they produce. The income is not the subject of the tax; it is the basis for determining the amount of tax.” and, "[T]he amendment made it possible to bring investment income within the scope of the general income-tax law, but did not change the character of the tax. It is still fundamentally an excise or duty..." House Congressional Record, March 27, 1943, p. 2580, statement of former Treasury Department legislative draftsman F. Morse Hubbard, (emphasis added). "The Supreme Court, in a decision written by Chief Justice White, first noted that the Sixteenth Amendment did not authorize any new type of tax, nor did it repeal or revoke the tax clauses of Article I of the Constitution, quoted above. Direct taxes were, notwithstanding the advent of the Sixteenth Amendment, still subject to the rule of apportionment…" Report No. 80-19A, 'Some Constitutional Questions Regarding the Federal Income Tax Laws' by Howard M. Zaritsky, Legislative Attorney of the American Law Division of the Library of Congress (1979) (emphasis added). Income tax return forms, both before and after the 16th Amendment, acknowledge the excise character of income taxation, and that taxable "income" is a distinguished subclass of what comes in, rather than "all that come in": "I hereby certify that the following is a true and faithful statement of the gains, profits, or income of _____ _____, of the _____ of _____, in the county of _____, and State of _____, whether derived from any kind of property, rents, interest, dividends, salary, or from any profession, trade, employment, or vocation, or from any other source whatever, from the 1st day of January to the 31st day of December, 1862, both days inclusive, and subject to an income tax under the excise laws of the United States." The affirmation on the first income tax return form (emphasis added). "I swear or affirm that the foregoing return, to the best of my knowledge and belief, contains a true and complete statement of all taxable gains, profits and income received by me during the year for which the return is made,... The affirmation on the 1916 income tax return form (emphasis added). The income tax is an excise. Congress says so, the Executive says so, the Supreme Court says so. All also affirm that to be subject to the tax, or a measure of the tax, any given gain must be distinguished by connection with taxable events or activities. The income tax is NOT a tax on all that comes in. Instead, because the tax IS an excise, as Brushaber unmistakably rules, and as the Supreme Court repeats many times over the decades, Petitioners' earnings could only qualify as taxable (or as a measure of tax liability) if they are products of privileged activities. See Thomas v. United States, 192 U. S. 363 (1904); Flint v. Stone Tracy Co., 220 U.S. 107 (1911) ("As was said in the Thomas case, 192 U. S. 363, supra, the requirement to pay [excise] taxes involves the exercise of privileges...").[1] The "privilege" element of the income tax is established independently of the legal character and constraints native to excises, as well. A tax on, or measured by, unprivileged receipts is a capitation: "..Albert Gallatin, in his Sketch of the Finances of the United States, published in November, 1796, said: 'The most generally received opinion, however, is that, by direct taxes in the constitution, those are meant which are raised on the capital or revenue of the people;...' "He then quotes from Smith's Wealth of Nations, and continues: 'The remarkable coincidence of the clause of the constitution with this passage in using the word 'capitation' as a generic expression, including the different species of direct taxes-- an acceptation of the word peculiar, it is believed, to Dr. Smith-- leaves little doubt that the framers of the one had the other in view at the time, and that they, as well as he, by direct taxes, meant those paid directly from, and falling immediately on, the revenue;...'" Pollock v. Farmer's Loan & Trust, 157 U.S. 429 (1895) "The taxes which, it is intended, should fall indifferently upon every different species of revenue, are capitation taxes,"… "In the capitation which has been levied in France without any interruption since the beginning of the present century, … people are rated according to ... what is supposed to be their fortune, by an assessment which varies from year to year."... "[I]n the first poll-tax [some] were assessed at three shillings in the pound of their supposed income,..." Adam Smith, ‘An Inquiry into the Nature and Causes of the Wealth of Nations’, Book V, Ch. II, Art. IV (1776) "CAPITATION, A poll tax; an imposition which is yearly laid on each person according to his estate and ability." Bouvier's Law Dictionary, 6th Ed. (1856). (The official law dictionary of Congress when the income tax was enacted.) Further, taxes on the exercise of rights are inherently direct, regardless of the label put upon them: "'Direct taxes bear immediately upon persons, upon the possession and enjoyments of rights;...'” Knowlton v. Moore, 178 U.S. 41 (1900) Engaging in unprivileged economic activity and receiving and enjoying the fruits therefrom is a right: "The right to follow any of the common occupations of life is an inalienable right… It has been well said that ‘the property which every man has in his own labor, as it is the original foundation of all other property, so it is the most sacred and inviolable. The patrimony of the poor man lies in the strength and dexterity of his own hands, and to hinder his employing this strength and dexterity in what manner he thinks proper, without injury to his neighbor, is a plain violation of this most sacred property’. Smith, Wealth of Nations, Bk. I, c. 10.” Butcher’s Union Co. v. Crescent City Co.111 U.S. 746 (1883) (Concurring opinion) "Included in the right of personal liberty and the right of private property- partaking of the nature of each- is the right to make contracts for the acquisition of property. Chief among such contracts is that of personal employment, by which labor and other services are exchanged for money or other forms of property” Coppage v. Kansas, 236 U.S. 1 (1915) "Since the right to receive income or earnings is a right belonging to every person, this right cannot be taxed as privilege.” Jack Cole Co. v. MacFarland, 337 S.W.2d 453 (S. Ct. of Tenn. 1960) "[Although the Legislature may declare as privileges and tax as such for State revenue purposes those pursuits and occupations that are not matters of common right], the Legislature has no power to declare as a privilege and tax for revenue purposes occupations that are of common right." “The right to engage in an employment, to carry on a business, or pursue an occupation or profession not in itself hurtful or conducted in a manner injurious to the public, is a common right, which, under our Constitution, as construed by all our former decisions, can neither be prohibited nor hampered by laying a tax for State revenue on the occupation, employment, business or profession. ... Thousands of individuals in this State carry on their occupations as above defined who derive no income whatever therefrom. But, where an income is derived from any occupation, business, profession or employment, then the Legislature may lay thereon a tax...” Sims v. Ahrens, 167 Ark. 557, 594, 595 (Ark S. Ct. 1925) Capitations and other direct taxes are prohibited by the United States Constitution unless apportioned: "No capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken." United States Constitution, Article 1, § 9, cl. 4 As has been exhaustively shown, this Constitutional rule has never changed, and the 16th Amendment in no way authorized a non-apportioned capitation or other direct tax. Hence, the unapportioned income tax cannot (and does not) fall "indifferently on every different species of revenue" but only falls on revenue distinguished by its connection to an exercise of privilege. The limited scope of the tax as actually authorized, written and ruled upon is interestingly underscored by recent corrupt efforts of Respondent-- and even some apparently co-opted judges-- to claim that Brushaber holds that the 16th Amendment authorizes a non-apportioned direct tax. See, for example, “[T]he income tax is a direct tax,... See Brushaber v. Union Pacific Railroad Co., 240 U.S. 1, 19, 36 S.Ct. 236, 242, 60 L.Ed. 493 (1916) (the purpose of the Sixteenth Amendment was to take the income tax "out of the class of excises, duties and imposts and place it in the class of direct taxes"). United States v. Francisco, 614 F.2d 617, 619 (8th Cir. 1980) On the website and in many of the publications produced by Respondent and his agent this same false claim is made, as in the example below: The Law: The courts have both implicitly and explicitly recognized that the Sixteenth Amendment authorizes a non-apportioned direct income tax on United States citizens and that the federal tax laws as applied are valid. In United States v. Collins, 920 F.2d 619, 629 (10th Cir. 1990), cert. denied, 500 U.S. 920 (1991), the court cited Brushaber v. Union Pac. R.R., 240 U.S. 1, 12-19 (1916), and noted that the U.S. Supreme Court has recognized that the "Sixteenth Amendment authorizes a direct nonapportioned tax upon United States citizens throughout the nation." https://www.irs.gov/businesses/small-businesses-self-employed/anti-tax-law-evasion-schemes-law-and-arguments-section-iv (last entry on the page) These false statements of the Brushaber ruling-- which are not, it should be noted, mere "misconstructions" or even disagreements with what the court says, but rather are express ascriptions to the Brushaber court of language and declarations which it does not say and which are the exact opposite of what it does say-- have been used to justify applying or enforcing the income tax upon unprivileged earnings (or the activities which produced them). This deception on behalf of such a purpose powerfully emphasizes that the Brushaber ruling (and all other authority) does not allow application of the tax to unprivileged earnings or activities (and instead prohibits it). (It is to be noted that there is actually a compound lie in the IRS assertion above. One part is the repeat of the 10th Circuit's falsehood about Brushaber. The other is the incorporation of the expression, "cert. denied" into that deceitful parroting. Contrary to what is mendaciously suggested by that inclusion, the Supreme Court's denial of certiorari is in no way an affirmation of the circuit court's falsehood: "[I]t is elementary, of course, that a denial of a petition for certiorari decides nothing." Hughes Tool Co. v. Trans World Airlines, Inc. 409 U.S. 363, (1973); see also United States et al. v. Carver et al., 260 U.S. 482, (1923) ("The denial of a writ of certiorari imports no expression of opinion upon the merits of the case, as the bar has been told many times.").) [THE FOLLOWING MATERIAL TO THE CLOSING BRACKET IS OPTIONAL FOR INSERTION AT THIS POINT, BUT IS ENCOURAGED: The accuracy of the foregoing analysis is not a matter of mere argument. It has been contemporaneously acknowledged on hundreds of thousands of occasions by tax-law specialists in at least 36 state and federal government agencies. Since 2003 when legal scholar Peter E. Hendrickson first published the preceding analysis in his book 'Cracking the Code- The Fascinating Truth About Taxation In America', at least 36 state and federal executive department tax agencies-- all experts in this particular area of law and all charged with a duty to collect all actually-owed income taxes-- have systematically issued refunds to tens of thousands of American men and women who have claimed refunds based on this information. Refunds made by the federal government include all Social Security and Medicare withholdings made pursuant to provisions in Chapter 21 of Title 26 as well as the normal tax withholdings made pursuant to provisions of Chapter 24. The total number of such events, each one of which constitutes an acknowledgement of the accuracy and correctness of the claim, and hence of the legal analysis on which it is based, is estimated as exceeding 250,000 at the time of this writing (June 15, 2018). This estimate is based on trial testimony and sworn declarations by IRS officials, along with trial stipulations and hearing declarations by Department of Justice Tax Division attorneys (see Exhibit 1) as well as some 1,300 examples of these refunds available for inspection online at http://losthorizons.com/BulletinBoard.htm and http://losthorizons.com/EveryWhichWayButLoose.htm. Even beyond the sustained acknowledgements by dozens of tax agencies, perhaps the most telling indicator of the absolute accuracy of the analysis given above has been the deliberate misrepresentation by government actors of what is argued in the book ('Cracking the Code-...' ) in which that analysis first appeared. For instance, in a transparently-fraudulent "judicial action" in 2006-2007, a false "finding" was written by a DoJ Tax Division attorney declaring that the book argues that only government workers are subject to the income tax. In fact, the book debunks that hoary "tax protestor" argument and plainly and exhaustively explains that the tax can apply to anyone, as shown in Exhibit 2. But the object of the exercise was to pretend that 'Cracking the Code-...' is based on erroneous arguments. This is apparently in the hope of prompting reflexive and unexamined dismissal of the book and the arguments of anyone who could be shown to have studied the book. The false "finding" written by DoJ attorney Robert Metcalfe was signature-stamped by district court judge Nancy Edmunds. Edmunds had never read the material about the contents of which she had purportedly "found facts" (as she later admitted); had before her sworn statements debunking the lie about the contents of the book; and never had a single person, witness or otherwise, appear before her to be examined and possibly give her a basis to come to any kind of valid conclusions on the issue, all as also shown in Exhibit 2. Plainly, there can be only one reason for misrepresenting arguments made by one's adversary in a legal contest as just discussed and shown. That sole reason is that the actual arguments made (both in the book Cracking the Code-...' and here in the analysis above) are correct, and the truth to which they lead was and is adverse to the dissembler's corrupt purposes.] Under no circumstances, therefore, is Respondent's burden of proving that Petitioners owe any income tax or failed to report any taxable income on their returns, or that any deficiency exists for any other reason, met by simply alleging-- or even proving-- that gains were had. Rather, Respondent must prove that Petitioners received gains as a result of engaging taxable events or activities. 2. No evidence has been introduced into the record of any taxable events or activities by which liabilities of Petitioners could arise. a. The "information returns" on which Respondent relies are hearsay, and do not fall under the "business records" exception to FRoE 802 as to their allegations that any payments made to Petitioners constituted or were connected with taxable events. In support of his allegations of taxable conduct or other grounds for the assertion of tax liabilities against Petitioners, Respondent has produced nothing but unsworn "information returns" created by third parties. Every document, assertion or allegation made by Respondent or his agents, representatives or counsel, including any purported "examination reports" and all else, rest entirely on those untested third party information returns (IRs), which Respondent self-servingly treats as infallibly true and correct. However, understood as the product of fallible humans, or even if not, the IRs on which Respondent exclusively and entirely relies are sufficient evidence of nothing. As a starting point, the IRs are mere hearsay, and are inadmissible under FRoE 802: Hearsay is not admissible unless any of the following provides otherwise: · a federal statute; · these rules; or · other rules prescribed by the Supreme Court. Federal Rules of Evidence Rule 802 Petitioners objected to their admission during trial (Tr. Trans. pp. ____). IRs are not "business records" in regard to their allegations of taxable events. Such records may qualify as "business records" and be excepted from the hearsay rule as to their reports that certain amounts of money were paid, and be taken as proof of such payments if not specifically disputed as to those specific allegations. But IRs are not "business records" in their allegations that the payments reported upon them are not simply the product of the untaxable exercise of rights and are instead distinguishable into the category of taxable events. The specific statutory design of IRs embraces this critical distinction. For example, the statutory specifications for the creation of a W-2 (found at 26 U.S.C. § 6051(a)) require that only payments meeting express statutory definitions be reported on the form, rather than that any and all payments of money be reported: (1) the name of such person, (2) the name of the employee (and his social security account number if wages as defined in section 3121(a) have been paid), (3) the total amount of wages as defined in section 3401(a), (4) the total amount deducted and withheld as tax under section 3402, (5) the total amount of wages as defined in section 3121(a), (6) the total amount deducted and withheld as tax under section 3101, 26 U.S.C. § 6051(a) (emphasis added) Axiomatically, the fact that what is to be reported on the form is distinguished in this manner ("wages as defined at ") means that what appears on the forms is conclusory in nature rather than a mere recital of payments made. What appears on IRs consists of allegations that particular things happened in particular ways, the conclusory nature of which is illustrated and emphasized by the fact that the forms are required to be accompanied by declarations that what appears on them is true, complete and correct to the best of the submitter's knowledge and belief. It is obvious that the actual truth of conclusory allegations on an IR does not establish itself, and cannot be taken for granted. The one making them may be incompetent, malicious, or lacking in necessary knowledge. IRs are affidavits, not "business records". The conclusory allegations made on an "information return" are of the exact sort distinguished by the Federal Rules Of Evidence Advisory Committee as NOT falling within the "business record" exception to the rule excluding hearsay. As the Committee points out in it's explanation of the limits of FRoE 803(6): "In Palmer v. Hoffman, 318 U.S. 109, 63 S.Ct. 477, 87 L.Ed. 645 (1943), exclusion of an accident report made by the since deceased engineer, offered by defendant railroad trustees in a grade crossing collision case, was upheld. The report was not “in the regular course of business,” not a record of the systematic conduct of the business as a business, said the Court. The report was prepared for use in litigating, not railroading." Just so, forms W-2 and 1099 are not made "for railroading". Instead, they are made for submission to governments for use as testimonial declarations in legal proceedings by which tax liabilities will be determined, again, as illustrated and emphasized by the fact that the forms are required to be accompanied by declarations that what appears on them is true, complete and correct to the best of the submitter's knowledge and belief. In the case before the Court the W-2s and 1099s upon which Respondent rests its entire argument were created by private-sector companies which do not ever complete government forms of any variety "in the normal course of their business". Thus, the only aspect of the information returns relied upon by Respondent which can be admitted as "business records" is their declarations that certain amounts of money were paid and certain amounts were withheld on various pretexts. They cannot be admitted for the proposition that the reported payments were connected with taxable activities, or that the withholdings were appropriate, or anything else. As a consequence, Respondent's determination of deficiencies is entirely without factual foundation, and as is shown throughout this memorandum, Respondent's notices of deficiency are dyed-in-the-wool arbitrary and capricious, Therefore... b. Even if deemed admissible as to their allegations of taxable events or activities, the information returns exclusively relied upon by Respondent are insufficient to establish any basis for deficiencies or liabilities. The courts are consistent that information returns allegations are never sufficient in and of themselves as an evidentiary basis for determining the existence or correctness of deficiencies or liabilities: "Defendants are correct that the 1099s, on their own, do not create tax liability. Form 1099 is an informational return, filed by a third party to the relationship between the IRS and the taxpayer, which reports income as that third party believes it to be. The Internal Revenue Code makes it clear that a Form 1099 is not the final word on what a taxpayer's taxable income is. As provided in 26 U.S.C. § 6201(d): "In any court proceeding, if a taxpayer asserts a reasonable dispute with respect to any item reported on an information return ... by a third party ... the [IRS] shall bear have [sic] the burden of producing reasonable and probative information concerning such deficiency in addition to such information return." "The Tax Court has held that a Form 1099 is insufficient, on its own, to establish a taxpayer's taxable income. See Estate of Gryder v. Commissioner, T.C. Memo. 1993-141, 1993 WL 97427, 65 T.C.M. (CCH) 2298, T.C.M. (RIA) 93,141 (1993), citing Portillo v. Commissioner, 932 F.2d 1128 (5th Cir.1991). See also Portillo v. Commissioner, 988 F.2d 27, 29 (5th Cir. 1993) (a Form 1099 is "insufficient to form a rational foundation for the tax assessment against the [taxpayers in this case]."). Thus, while a Form 1099 can serve as the basis for the inception of an IRS investigation, it cannot and does not, on its own, create tax liability or establish how much income the taxpayer actually received." Daines v. Alcatel, S.A., 105 F.Supp.2d 1153, 1155 E.D. Washington, 2000 "That which is not in fact the taxpayer's income cannot be made such by calling it income." Hoeper v. Tax Comm'n of Wis., 284 US 206, 215 (1931) Also see Mason v. Barnhart, 406 F.3d 962 (8th Cir., 2005); Rendall v. CIR, 535 F.3d 1221 (10th Circ., 2008) and cases cited; and Perez v. CIR, T.C. Summary Opinion 2009-94. The chief purpose of the independent supporting evidence required by 26 U.S.C. §§ 6201(d) and 7491(a) is to attempt to prove that payments reported on disputed information returns (i.e., W-2s) actually fall into the category of payments for the actual conduct of taxable activities and are not mere payments for common, unprivileged activities which should not be so reported. This distinction is usefully illuminated by F. Morse Hubbard in his statements read into the Congressional Record in 1943: "The Income tax... ...is an excise tax with respect to certain activities and privileges which is measured by reference to the income which they produce. The income is not the subject of the tax; it is the basis for determining the amount of tax", ...and by the statutory specifications at 26 U.S.C. § 6051 of what is to be reported on a W-2: (3) the total amount of wages as defined in section 3401(a), ... (5) the total amount of wages as defined in section 3121(a), ...the language of which, on its face, distinguishes the "wages" to be reported from the broad class of all wages (else otherwise no statutory definition would be needed or provided). Obviously, the creator of "information returns" could be ignorant of the purpose of the forms, or of the law; could be generally incompetent; or could even be malicious. Further, that the allegations on such forms is insufficient is also specified by law. As clearly declared by the courts cited above, 26 U.S.C. § 6201(d) requires that in any proceeding in which allegations on "information returns" are challenged (as they are here in the error assignments of the petition in this case), "the [IRS] shall bear the burden of producing reasonable and probative information concerning such deficiency in addition to such information return." 26 U.S.C. § 7491 imposes the same requirement: (a) Burden shifts where taxpayer produces credible evidence (1) General rule If, in any court proceeding, a taxpayer introduces credible evidence with respect to any factual issue relevant to ascertaining the liability of the taxpayer for any tax imposed by subtitle A or B, the Secretary shall have the burden of proof with respect to such issue. 26 U.S.C. § 7491 -Burden of proof Petitioners have introduced credible evidence with respect to the factual issue of whether or not payments they received qualified as "wages" as defined at 26 U.S.C. §§ 3121(a) or 3401(a) [or as "self-employment income", etc.]. "Credible evidence [under 7491(a)] is the quality of evidence which ... the court would find sufficient upon which to base a decision on the issue if no contrary evidence were submitted (without regard to the judicial presumption of IRS correctness)." H. Conf. Rept. 105-599, at 240-241 (1998), 1998-3 C.B. 747, 994-995 (emphasis added) Petitioners' sworn Forms 4852 [or 1099 rebuttal instrument, etc.] are sufficient as the basis of a decision if no contrary evidence were submitted. They are of equal stature to the third-party allegations relied upon by Respondent. Both constitute testimony and conclusions from parties to the events at issue. One (the payor's) supports the Respondent-preferred conclusion that payments made qualified for reporting under the provisions of 26 U.S.C. § 6051(a) [or 6041, etc.] and all else that attends qualified payments. The other (Petitioners') disputes the Respondent-preferred but unsupported allegations and conclusions of the payor[s]. The law, at both 26 U.S.C. §§ 6201(d) and 7491(a), says that in this situation Respondent must produce evidence supporting his preferred view in addition (and thus external) to the mere third-party allegations on which he now exclusively relies. Petitioners were not negligent, nor did Petitioners knowingly or negligently disregard any rules or regulations governing the preparation of tax return[s] for the year[s] _________. Petitioners were not careless or reckless in the preparation of their tax returns and did not intentionally disregard any tax rules or regulations. Petitioners have always fully cooperated with the Secretary and/or Respondent, (including providing, within a reasonable period of time, access to and inspection of all witnesses, information, and documents within the control of Petitioners as reasonably requested by the Secretary), and Respondent has produced no evidence to the contrary. Respondent's failure to support the third-party allegations on which he relies, and that failure having established as a matter of law that Petitioners' filings and claims are undisputed, Petitioners' filings and claims raise a reasonable dispute by which the provisions of 26 U.S.C. §§ 6201(d) and 7491(a) are clearly invoked. As the record stands, all parties agree (or have no evidence saying otherwise) that P received no "income", while nonetheless having had amounts withheld. Under those facts, P's filing and claims are completely reasonable, as is his dispute with respect to any item of income reported on those W-2s, and P's evidence by way of his sworn filings are perfectly credible. Indeed, in light of the totality of legally-sufficient evidence in the record, Ps filings and claims are in the only form and manner that could be reasonable. Pursuant to 26 U.S.C. § 6201(d) and 26 U.S.C. § 7491 Respondent must produce evidence additional to the allegations, assertions or reports appearing on the third-party "information return" forms on which he relies, just as is said by all the courts cited above, even if these non-business-record hearsay documents are allowed to serve as evidence of anything other than that certain amounts of undistinguished money was paid. He has produced no such additional evidence, and therefore, no relevant evidence in support or defense of his Notice(s) of Deficiency whatsoever, and his determinations must therefore be found to be baseless, as a matter of law. 3. Respondent's failure to produce returns of its own in opposition to those submitted by Petitioners further establishes that his deficiency allegations are without foundation, arbitrary and capricious and made in bad faith. Further credible evidence in support of the fact that Petitioners did nothing taxable, and are known to have done nothing taxable even by Respondent, is Respondent's failure to create returns as mandated under 26 U.S.C. § 6020(b) when a filer's returns are believed false or fraudulent (or frivolous, per 26 C.F.R. § 301.6020-1(b)). See exhibit ___, an IRS Disclosure Officer's admission in response to a Freedom of Information Act request that no documentation of any relevant 6020(b) returns can be found in IRS records. The requirements under 6020(b) are non-discretionary. If any person fails to make any return required by any internal revenue law or regulation made thereunder at the time prescribed therefore, or makes, willfully or otherwise, a false or fraudulent return, the Secretary shall make such return from his own knowledge and from such information as he can obtain through testimony or otherwise. 26 U.S.C. § 6020(b)(1) (emphasis added) (1) In general. If any person required by the Internal Revenue Code or by the regulations to make a return ... fails to make such return at the time prescribed therefore, or makes, willfully or otherwise, a false, fraudulent or frivolous return, the Commissioner or other authorized Internal Revenue Officer employee shall make such return from his own knowledge and from such information as he can obtain through testimony or otherwise. 26 C.F.R. § 301.6020-1(b) Execution of returns (Emphasis added.) ”Shall” in statutes is mandatory. Lexecon, Inc. v. Milberg Weiss Bershad Hynes & Lerach, 523 U.S. 26, 35 (1998) (“The mandatory ‘shall’ … normally creates an obligation impervious to judicial discretion.”) In fact, the mandate exists in order to provide Respondent with a basis for alleging tax obligations at variance with what can be calculated on an allegedly false, fraudulent or frivolous return, or when no return has been filed at all. "[T]he purpose of section 6020(b)(1) is to provide the Internal Revenue Service with a mechanism for assessing the civil liability of a taxpayer who has failed to file a return, [or, mutatis mutandis, filed what the government deems to be a "false, fraudulent or frivolous" return]...” United States v. Lacy, 658 F.2d 396 (5th Cir. 1981) (citing United States v. Harrison, 486 F.2d 1397 (2d Cir. 1972) Respondent's failure to allege any falseness or other defect in Petitioner's returns by exercising his duty under 6020(b) if this is sincerely believed indicates that his allegations of deficiency are arbitrary, capricious and false. Further, that failure of Respondent to dispute Petitioners' filings constitute tacit agreement by Respondent with the content of Petitioners' filing[s] in every material way. Thus, the record shows that both parties in this case agree that Respondent has no valid claim against Petitioners. In Summary Respondent must allege and prove that Petitioners engaged in actual taxable activities, not simply that they received money. The only purported evidence Respondent has introduced, third-party "information returns", are inadmissible for such purposes, being hearsay and not qualified for any "business record" exception insofar as their explicit or implicit allegations of taxable activities are concerned. Further, even if deemed admissible and even if deemed credible despite being untested as to the competence and sincerity of their creators, the third-party information returns which are Respondent's exclusive effort to carry his burdens of proof are insufficient to do so by themselves. The law, as well as simple common sense, requires more. But there is no more. Respondent has utterly failed to substantiate his claims, and, in fact, has indicated his agreement with the correctness of Petitioners' filing[s] in every material way by his declining to create returns of his own as mandated by 26 U.S.C. § 6020(b) when he believes or has reason to believe that a filer's returns are false, fraudulent or frivolous. The Court must find that no deficiencies exist and no taxes, penalties or other products of outstanding liabilities are due from Petitioners. [1] “Case law recognizes no distinction between a privilege tax and an excise tax. See Bank of Commerce & Trust Co. v. Senter, 260 S.W. 144, 148 (Tenn. 1924) (“Whether the tax be characterized in the statute as a privilege tax or an excise tax is but a choice of synonymous words, for an excise tax is an indirect or privilege tax.”); American Airways, Inc. v. Wallace, 57 F.2d 877, 880 (M.D. Tenn. 1937) (“The terms ‘excise’ tax and privilege’ tax are synonymous and the two are often used interchangeably.”); see also 71 AM JUR. 2d State and Local Taxation §24, (“The term ‘excise tax’ is synonymous with ‘privilege tax,’ and the two have been used interchangeably. Whether a tax is characterized in the statute imposing it as a privilege tax or an excise tax is merely a choice of synonymous words, for an excise tax is a privilege tax.”) Thus, the excise tax now before us is, by more complete description, purportedly an excise upon a particular privilege, assessed according to the quantity of substance possessed in enjoyment of such privilege.” Waters v. Chumley, No. E2006-02225-COA-RV-CV CoA of Tenn. (2007) ***** NOTE: It will have been observed that there are a few references in the argument text above that to things done in trial or at other times (such as having objected to the admission of IRs; securing transcripts and/or Certs. of Assessment and/or FOIA request responses, and introducing them as evidence; introducing into evidence educated returns for the periods involved, etc.). Obviously, any use made of this material must involve customizing it to whatever accurately fits any particular circumstances, including the addition of references to exhibits, transcript citations and excerpts of relevant testimony in trial, and so forth.. Also obviously, any use or reliance on any of this material is entirely at the discretion of the user. No guarantees of outcome are made or implied. NOTE II: Check here to see some particular and important considerations relevant to filing a suit for refund. NOTE III: Here are links to sources for the more difficult-to-find authorities referenced in section B(1): Cornell Law Quarterly, 1 Cornell L. Q. pp. 298, 301 (1915-1916) Harvard Law Review, 29 Harv. L. Rev., p. 536 (1915-1916) House Congressional Record, March 27, 1943, p. 2580 Report No. 80-19A, 'Some Constitutional Questions Regarding the Federal Income Tax Laws' The affirmation on the first income tax return form The affirmation on the 1916 income tax return form Waters v. Chumley, No. E2006-02225-COA-RV-CV CoA of Tenn. (2007) Bouvier's Law Dictionary, 6th Ed. (1856) Jack Cole Co. v. MacFarland, 337 S.W.2d 453 (S. Ct. of Tenn. 1960) Sims v. Ahrens, 167 Ark. 557, 594, 595 (Ark S. Ct. 1925) NOTE: Be alert to evidence of fraud or lesser-grade deceptions by the govt. in "deficiency" cases (and all others, for that matter). For example, if dealing with a Notice of Deficiency, look at the upper right corner of the first page of the Form 4549 "Examination Report" accompanying the notice. There is a text block there for entering the name of the person with whom the "examination changes" were discussed. Is what appears in that spot on the form you received accurate? Probably not... Though I speculate, false entries in that spot are likely fraudulent efforts to put into the record evidence that an actual examination-- due diligence and the good-faith completion of obligations of duty-- was conducted by the government before the issuance of the NOD. This entry, if untrue, establishes that the government brought the purported "deficiency determination" in bad faith, and without having engaged in any due diligence. That is, an untrue entry establishes that the NOD is fraudulent, arbitrary and capricious, as well as without any credible grounding in facts. Discovering whether the creator of the "information returns" upon which the "Examination Report" conclusions rely was ever contacted and examined (highly unlikely) can add icing to that cake when it is served up as an "extra" in trial or a brief, or perhaps even made the subject (or one of the subjects) of a pre-trial motion for summary judgment. IN THE SAME VEIN (that of putting your adversary in the wrong at every opportunity and showing his insincerity and outright bad faith), make use of the evidence of corrupt resistance and suppression of CtC detailed and documented in the posts here and here. Always keep squarely in mind that any resistance or opposition to an honest and accurate CtC-educated filing IS FALSE, and say so and show so, at every opportunity. The judge in your case has the choice of being with the bad guys, or with the good guys. Be sure he or she knows this, knows that you know this, and knows that you will point out bad choices to the next tribunal up the food chain. |